INTRODUCTION

DEFINITION OF AUDITING
Auditing is an independent examination of books of accounts and related evidence from which
the financial statements or Final accounts of an entity are derived in order to form an opinion and
give the readers of these financial reports, the confidence as to whether the financial statements
prepared portray a true and fair view of the Company’s state of affairs as at that date.

Alternatively, Auditing can be defined as an independent examination of the books of accounts

of the company along with the relevant evidence with the view of forming an opinion as to
whether the books of accounts have been maintained in accordance to the Company’s Act and
whether the final A/Cs prepared from accounts present a true and fair view of the state of affairs
of the Co. as at that particular date.

INDEPENDENT EXAMINATION:
The phase independent examination implies the followings:
(i) The examiner (Auditor) should not have blood relations with parties whose books
are being examined and those who will use his or her report.
(ii) The examiner (Auditor) should not give or obtain guarantees to and from those
parties.
(iii) The Auditor should not have any interests in the organization or Company whose
books are being examined.

OPINION
After examining the books of accounts and the related documentary evidence, the Auditor
(Examiner) will give a report in regards to the truthfulness and fairness of the state of affairs in
the financial statement. The report may be favorable (good) or unfavorable (bad) or poor. The
final conclusion of the auditor is expressed in form of opinion. The opinion formed will be in
relations to the following issues:

 Whether the books of accounts and the related documents were maintained according to
the accounting conventions or the accounting standards in place.
 Whether the auditor receive all the necessary information required for audit work.
 Whether the financial statements prepared from the books of accounts represent a true
and fair view of the state of affairs of the organization or Company.

CONFIDENCE AND ASSURANCE

The users of the information contained in the audited financial statements should be given the
assurance that the financial information in the report is genuine and reliable.

TRUE AND FAIR VIEW

This expression means that the information presented in the financial statements is not
necessarily exact but more or less the reflection of what transpired. That there is no material
misstatement of facts and that the report is not misleading as far as its use for decision making

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purpose is concerned. The financial information presented is worthy relying upon by the
interested parties.

The major books to be maintained include:

 The cash book

 The ledger
 Assets register
Final accounts required for purposes of auditing include;
 The income statement also known as the trading, profit and loss A/C
 The balance sheet also known as Statement of Financial Position
 The funds or cash flow statements

Others include:
 List of Board of Directors
 Minutes of Board meetings
 Policy documents
 Shareholders’ register

USERS OF AUDITED FINANCIAL STATEMENTS OR REPORTS

Today, there is a wide range of stakeholders interested in the annual reports of companies
and related organizations. They have interest in the audited report of their organization for
various reasons>

A. Potential or Actual users or stakeholders

They include but not limited to the following;

 Owners of resources or shareholders to know if their wealth creation and

growth objective is being taken care of.
 Lenders or debenture holders for determination of credit worthiness of the
company in question.
 Prospective investors want to understand from the financial report whether it
is worthy to invest in the company.
 Suppliers of services and goods use it for assessing the credit worthiness of
the company before supplying goods and services
 Employees of the organization for determining job security

B. Other stakeholders or users of Audited Financial report include

 People who should guide and advice management like Accountant, stock brokers,
credit rating agencies and statisticians.
 Competitors and people interested in amalgamation and take over.
 Tax authorities use audited accounts for levying tax.
 Investment authorities may use audited accounts of companies for price control,
consumers’ protection, business regulation and control.

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 The general public is concern about consumers’ protection and environmental
protection and audited accounts can help in knowing what the business is doing in
respect to these issues.

All the above parties need assurance that the financial statement presented by the
company are reliable and that they reflect a true and fair view of the state of affairs.

REASONS FOR THE DEVELOPMENT OF AUDITING

1. Stewardship and stewardship accounting
Today most businesses are operated by corporate organizations owned by shareholders who
entrust hired managers to manage their (shareholders’) wealth or resources with the view of
having the resources put to proper use to create more values or wealth.

The directors and managers are therefore caretakers of the resources of shareholders and as such
they have to manage the resources entrusted to them with sense of responsibility.
The owners of the resources (shareholders) are not sure if their wealth is put to proper use and
are therefore concerned to know the extent to which their resources are managed well to their
interest. There is need to have independent and external persons/ auditors to give confidence to
the shareholders that their resources have been managed well.
The process by which the managers or directors of Co. account or report to the shareholders in
regards to the resources entrusted to them is referred to as Stewardship accounting which is done
by means of financial statements.

2. Formation of Professional Accounting bodies such as ACCA, CPA, and CIMA. Hence, there
was need to have a universal practice in the field of audit and assurance.

3. The requirement of the Company’s act that limited companies must be audited annually.

4. The increasing complexity and size of the modern enterprises whereby multinational
Companies have their headquarters in a given country with branches in many other countries.
Auditing is the only means to control and evaluate activities of the foreign branches.

5. The requirement that an auditor should report on the profit and loss A/c and other financial
statements by reviewing the transactions that took place during the period.

6. The existence of the agency problem between shareholders (principal) and the directors or
managers (Agents) as described in 1 above. If left alone the agents (managers) will satisfy their
own interest at the expense of shareholders’ interest of wealth creation and growth. Audit is
therefore very important in this situation.

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Ancient View and modern View of Auditing
Ancient View Modern View
 To detect errors &fraud  To give views if reports are true &
 No Accounting bodies fair
regulated audit  Accounting bodies exist & regulate
 No company Act in place audit
 Auditing involved just  Company’s act in place & used
Vouching  Auditing is more complex.

THE DIFFERENCE BETWEEN AUDITING AND ACCOUNTING

AUDITING ACCOUNTING
 It is performed by an auditor who must  May be done by a person who is not a
be a qualified accountant. qualified accountant.

 It involves examination of the books of  It involves preparation of the books of

accounts & forming an opinion on accounts to aid managerial decision
them. making.

 Is conducted at the end of a period or  It is a continuous and routine work.

required intervals.

 Conducted on the prepared final  It is the preparation of final accounts.

accounts.

 The person performing the work  An accountant is an employee of the

(Auditor) must be independent. entity and is influenced by managers /
Directors.
 Audit work is conducted according to  Accounting is not necessarily done
audit program. according to any laid down program but
a routine.

 Auditing is a statutory requirement i.e.;  It is not a statutory requirement that an

the law requires that every firm or organization or a Company must carry
Company must have an external audit out accounting work but it is part of
& its books must be audited. normal management work.

BENEFITS / ADVANTAGES OF AUDITING

 Provides assurance and credibility to the accounting information and reports by way of
audit report.
 Auditing protects the owner’s interest i.e.; auditing protects assets of the firm against
misuse.

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 It makes the figures for dividends and share of profits among shareholders to be relied
upon.
 It helps in detection and prevention of errors and fraud.
 Auditing boasts moral of accounting staff and make them more vigilant in maintaining up
to date accounting information.
 Audited accounts can be used by the entity to solicit financial resources from lending
institutions.
 Audited accounts minimize disputes among stakeholders / shareholders.
 Audited accounts are a basis for determining the price of a business being sold as a going
concern.
 Through audit reports, accurate calculation of insurance compensation and tax refunds
are made possible.
 Tax liabilities can be accurately calculated and relied upon by tax authorities.
 In partnership, audited accounts are the basis for sharing profits and losses among the
partners hence, minimizing disputes among the partners.
 Admission of new partners into the partnership is guided by audit report.
 On death of a partner or on dissolution of partnership, audited accounts are a basis for
distribution of assets and liabilities amongst partners.
 Acquisition, amalgamation and takeover are facilitated by audit accounts.
 Audited accounts enhance the business position and prospects as it gives motivation to all
the employees of the company.

DISADVANTAGES OF AUDITING

 Audit is a very expensive process for a small Co. in terms of professional audit fees and
related audit expenses.
 If the report is bad, it can have devastating impact on the organization even to the extent
of collapse.

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DIFFERENCES BETWEEN ACCOUNTANT AND AUDITOR
ACCOUNTANT AUDITOR

1. Prepares books of A/Cs and keeps the 1. Examines the books of A/Cs & financial
books. statements.
2. Uses Journals & other books of original 2. Uses audit standards, programs & tests.
entry and ledgers.
3. Influenced by Management & other 3. Independent of all parties.
stakeholders.
4. Uses accounting standards & Manuals to
prepare his work. 4. Uses statement of audit standards. (SASs)

5. Does day today work of the company. 5. Does work periodically.

6. Is responsible for errors, fraud and 6. Only responsible for disclosing errors,
irregularities. fraud and irregularities should he/ she
comes across them.
7. Appointed by Management. 7. Appointed by shareholders
8. Removal of the accountant is done by the 8. Removal is done by the shareholders or
management. Registrar of the company as per the
company’s Act.
9. Does not owe duties and responsibilities to 9. Owes responsibilities and duties to third
third parties. party and shareholders.
10. Does not prepare report to shareholders. 10. Prepares report to shareholders
11. Is an employee of the company and 11. Is not an employee but a Consulatnt/
receives monthly salary. professional who gets audit fees and
professional fee.
12. Accountant’s scope of work is limited. 12. Auditor’s scope of work is unlimited.
WHY AUDITING/NEED FOR AUDITING

The problems which exist when managers report to owners of resources (shareholders or
donors is that the report may not be trusted due to the following reasons;
 The report may contain errors
 It may not disclose fraud perpetrated by management and employees.
 It may be misleading in the event certain facts have been hidden by management and
employees.
 The report may fail to disclose relevant and important information.
 The report may fail to conform to relevant regulations and standards governing financial
reporting.
The remedy to bring about credibility to financial reports produced by management is
therefore to appoint an independent person called an auditor to examine the report and make
an independent report on his /her findings.

AUDIT OBJECTIVES
Audit objectives are mainly two:
 Primary Objectives
 Secondary Objectives

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Primary Objectives
 To prove or certify whether the financial statements presented by management reflect
a true and fair view of the state of affairs of the company.
 To ascertain whether the company has kept proper books of accounts in accordance to
the Company’s Act and GAAPs.
 To write a report to the shareholders upon findings, after examining the books of
accounts and relevant document. The report must contain an opinion address to the
owners of the business. (The shareholders)
 The report must also be impartial and unambiguous so that it is not subject to
misinterpretation.

Secondary Objectives
 Professional bodies (ACCA, CPA) require or may allow auditors to give additional
services / advice to management of the company. Through the auditor’s management
letter pointing out areas of problems in the internal control system, planning and
implementation, budgetary control and investment management are highlighted.

 To support the clients to maintain an up-to-date book of accounts and to ensure the
availability of effective management information system (MIS). This is referred to as
Spin-off effect in which case, the auditor visits and assists the clients. These extended
services are considered to be outside the official scope of auditing.
 To detect and prevent any fraud and errors that may have been perpetrated.
 To boast the strength of the company’s internal control system.

ERRORS AND FRAUD

ERRORS:
These are unintended mistakes in the financial information or accounting records; instance of
errors include;
 Mathematical or clerical mistakes
 Transposition of figures
 Incorrect recording of figures
 Errors of Omission
 Wrong application of Accounting Policy

FRAUD
This refers to intentional misrepresentation of financial information by one or more individuals
among the management or employees to gain financial benefit. This may also involve other 3rd
parties. Instances of fraud include;
 Manipulation of figures
 Falsification of documents
 Alteration and destruction of records

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 Misappropriation of company assets for personal benefits. For instance; Cash,
Fuel, Store’s materials like food and beverages, stationery and other materials of
economic value.
 Suppression or Omission of certain transactions for personal economic benefits

Differences between Errors and Fraud

 When an error is made, there is no financial benefit accruing to the parties involved,
while in fraud, Officers involved get financial benefits or simply economic benefits.
 In most cases if not all, errors involve just an officer or one individual while fraud may
involve a number of officers conniving to misrepresent financial information deliberately.
 It is much easier to detect errors than to detect fraud, because with fraud the parties
involved are very much aware of the consequences and may disguise and quantify the
problem.

Whose responsibility and duty is it to detect or prevent Errors and Fraud

 It is not the duty or responsibility of the auditor to prevent errors and fraud, but this is
management responsibility by instituting strong internal control system.

 It is the duty of the Auditor to detect errors and frauds and report to the stakeholders
accordingly.

Instances that indicate presence of fraud

 Where an entity/company is managed by one person without a Board in place.
 Where there is complex co-operate / Organization Culture which seems not to be
warranting in recruiting people to work in the organization. (Handpicking employees)
 High turnover of personnel particularly in Accounts section especially.
 High turnover of experts who should play the role of advisors, for instance, Company’s
Lawyers, Company’s Auditors.
 Where there is understaffing yet there is too much work. Pressure of work may lead to
falsification of records especially where there is no proper segregation of duties.
 Where there is decline in the Company’s profitability without changing macro-Economic
phenomena to explain the trends. It may be taken that the declining trend is due to misuse
of the Company’s resources. The declining trend may be reflected in decrease in earning
per share, decrease in market value of shares for inability to declare dividends for
shareholders.
 Transactions between parties who have blood relations / financial relation or any form of
association may be a sign of fraud because these parties can easily connived/ associate.
 Unusual transactions at the end of financial year, such transactions may have significant
effects.
 Aggressive or Defensive and unreasonable response from management to audit queries.
Such responses may be construed as a cover up of fraud.

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 Existence of differences between accounts records and 3 rd party confirmations.
conflicting audit evidence and unexplained changes in the operating systems. Inadequate
documentation of transactions, lack of proper authorization or alteration of records.
 Incomplete transaction cycle, incomplete transaction files, non- compliance to GAAPs.

DETECTION OF FRAUD AND ERRORS

It is the primary duty of management to prevent and detect errors and fraud through
strong internal control measures. But it remains the Auditor’s incidental duty to detect it
through the following techniques.
 Use of analytical views.
These include applications of key ratios, averages, investigation of variances.

 Surprise checks: This may be done to check on petty cash, stocks and wages payments.
 By using 3rd party Confirmation on schedule of debtors and creditors.
 Use of Comparisons which include actual performance against budgeted performance,
forecasted performance against actual performance, past performance verses present
performance.
 By assessing the Company’s performance against industry average performance. A
situation which was not expected but has happened will raise concern. Likewise, a
situation which was expected but did not happen will raise concern.
 Use of Internal Audit function where possible would help to detect fraud. Internal Audit
is a constant appraisal of the Co’s operations.

PREVENTION OF FRAUD
The followings are some of the mechanisms that can help in preventing fraud;
 Routine checking and balancing of the Accounts.
 Instituting periodic comparisons of budgeted and actual situation and investigating any
unfavorable variances.
 Instituting strong division of duties and segregation of duties into distinct functions for
instance preparation, custody and interpretation of accounts.
 Use mechanized accounting systems, for instance, Cash register, teller Machines,
Computers to ensure that any data worked on can not easily be accessible.
 Use Internal Audit function
 Give reasonable Salaries and benefits to employees according to qualifications and
performance, while also bearing in mind experience and sensitivity of their job.
 Employ qualified staff to manage technical and sensitive
areas of the company.

QUALITIES / CHARACTERISTICS OF AN AUDITOR OR TRAITS

An auditor is to exhibit the followings Traits or Characteristics: -
 He must be Conversant/familiar with all branches of accounts (Cost & Management
Accounting), Accounting for taxes, accounting for stores materials and all the finance and
administrative procedures / guidelines.

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 An Auditor must know the client’s Business thoroughly before embarking on audit work.
That is, must know the type of business, the organization of the firm, documentation
systems, how books of accounts and related documents are maintained.
 An Auditor must be a person who is not easily influenced to engage in subversive
activities, that is, he must never sign any accounting documents unless he / she has
proved that all the documents are correct.
 An Auditor must seek Clarification on matters that he/she does not understand.
 An auditor must be familiar with mercantile law and Co. Law.
 The Auditor must be tactical and honest when dealing with his or her clients.
 An Auditor must never reveal the client’s secret to any 3rd party.
 He / she must be accurate and organized in the course of work.

THE PROFESSIONAL ETTIQUETTE / ETHICS FOR AUDITORS

These are rules of conduct that govern the auditing profession.
 The Auditor must be independent of the Co. or Enterprise under Audit. The auditor must
not be an employee of the co. or must not own more than 5% the shares of the Co. he is
Auditing.
 An auditor must never misrepresent facts knowingly otherwise he will be liable for any
loss suffered by a 3rd party who relies on his report.
 He /she must never delegate his or her judgment to others.
 An Auditor must not allow his or her name to be associated with any financial
statements/ reports which he or she has not audited.
 An Auditor should not express a positive opinion on audited accounts and financial
statements when actually they are not correct. These tantamount to cover up the reality
and truth and if this happens, the auditors are held liable for any consequences.
 He must not disclose the client’s secret to 3rd parties.
 An Auditor should not take up a new engagement without seeking the consent of the
retired auditor.
 They should never advertise for their services to the public.
 An auditor should not pay commission to obtain clients.
 An Auditor should never undertake any job free of charge.

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AUDITING POSTULATES/PRICINPLES
These are the minimum conditions upon which auditing is based. They are the foundation that
makes auditing meaningful. Auditing postulates give conceptual foundation upon which auditing
is based. If these foundations are missing then auditing becomes difficult and meaningless.

Mautz and sharaf (1961) advanced eight postulates of auditing and these postulates are the ones
guiding auditing today and they are as followed;
 Financial statements and financial data are verifiable.
If financial statement figures are not verifiable then auditing cannot take place. For
meaningful verification to take place there should be proper segregation of duties during
the process of incurring transactions. There should be proper documentation/filing
system in place. Verification looks at four issues namely Existence, Ownership, Value
and description of items reported in the financial statements.

 There is no conflict of interest between the Auditor and the management of the
enterprise being audited.
The auditor should not compromise audit work to meet management desire at the expense
of the organization’s performance and shareholders wealth maximization goal. Conflict
of interest may arise in a situation where the auditor wants to report the truth but
management may be interested in suppressing certain facts. Auditors should not give or
accept commissions/bribes in the course of audit because this would lead to conflict of
interest.

 The Financial statements and other information submitted for verification are free
from collusive and other irregularities.
Management is expected to present to the auditor information free from errors and fraud
as well as any other irregularities. This calls for management to be honest and transparent
in the course of their day-to-day work. For this reason, management is held responsible
for errors, fraud and any irregularities detected by the auditor during the course of audit.
The auditor only has the responsibility to blow the whistle should irregularities be
detected.

 The existence of a satisfactory system of internal control eliminates the possibility of

irregularities.
The first test to determine if errors, fraud and irregularities are highly suspected is carried
to assess the strength of the internal control system in place. It assumed that if the internal
control system is strong then chances for errors, fraud and other irregularities is minimal
otherwise, chances of errors and irregularities are high. For this reason, the sample
auditors take for audit depends on the result of test on internal control system. If the ICS
is strong, a smaller sample will serve the purpose but if the ICS is found to be week, the
sample should be bigger.

 Consistent application of GAAPs (General Accepted Accounting Principles) results

into fair presentation of the financial position and result of operations.
The GAAPS should be the basis for the accounting policy adopted by the company. Once
adopted it should be followed consistently without changes now and then, if financial

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reporting is to be consistent and comparable with past periods. If a particular accounting
policy has been adopted by the company, the same should be adhered to year in, year out.

 In absence of clear evidence to the contrary, what was held true in the past for the
enterprise under examination will hold true in the future.
At the end of the audit exercise the auditor issues out an opinion which is a final
conclusion to the results of the investigation carried out. The opinion may be unqualified
(favorable) one or a qualified (unfavorable) one. If in the previous audit the opinion was
unqualified, then it is assumed that the same will be the case in the next year’s audit
unless it will be found that management has fail to uphold the same record of
performance in its work in the subsequent year. Likewise, a qualified opinion will make
the auditors suspect that the next year’s audit opinion is most likely be a qualified opinion
again unless it will be evident that management has already overcome the problems
encountered in the previous audit.

 When examining financial statements for purposes of expressing an independent

opinion, the auditor acts exclusively in the capacity of an auditor.
In doing their work auditors should act independently at all times. The auditor is
personally responsible for any consequences arising from his or her professional
negligence by issuing out an opinion contrary to the facts surrounding the company’s
operations.
 The professional status of the independent Auditor imposes professional obligations.
Auditors are accorded high professional status and esteem because the public expects
them to behave professionally as public accountants. If they protect the public from
falling prey of unscrupulous companies then they have done the job well and as such they
are respected and held in high esteem. If they behave unprofessionally and fail to protect
public interest, the consequences are many, ranging from prosecution, imprisonment,
penalties and even cancellation of their certificate to practice by the accrediting
professional accounting bodies. (ICPAU)

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TYPES OF AUDIT
Basically, there are two types of audits namely; statutory audit and private audit.

Statutory Audit
 This is the type of Audit conducted in compliance with the requirement of Companies
Act and other regulations. The Companies Act requires that the Final accounts of all
Public Companies must be audited annually.
 The law also requires that the auditor’s report must be read to the shareholders at their
annual general meeting.
 The audited accounts of public limited companies must be filed with the Registrar of
Company.
 Audits demanded and guided by law are referred to as Statutory Audit and as such the
auditors of public Ltd. Companies are called statutory auditors because their
appointments are required and governed by law. They are also called External or
Independent auditors. The law also clearly spells out the books to be audited. Statutory
auditors are to have unlimited access to all sorts of information they deem necessary for
the audit work. Thus, the external auditors are supposed to be given all the information
they may require from officers and management of the Company without any
reservations.

Private Audit
 This is the type of audit done for firms like partnership, sole proprietor, Clubs and
societies and associations. The law does not impose the requirement that the final
accounts and documents of these private institutions must be audited, but this firm can at
their own convenience and needs appoint their private auditor to audit their accounts for
fulfilling their purposes other than requirement of law. For instance, such firms may
commission audit of their business for the purpose of getting loans from financial
institutions.
 There are however legal procedures required for auditing accounts of the private firms.
The type of audit work to be undertaken by the auditor is just an agreement between the
firm and auditor they appoint.

Differences between Statutory and Private Audit

STATUTORY AUDIT PRIVATE AUDIT

 This Audit is required by law/the  It is conducted according to the wish of

Company’s Act. the owners of the firm.
 The scope of the Auditor’s work is  The scope of the auditor’s work is a
defined by the Companies Act. matter of agreement between the two
parties.
 The Auditor addresses the report to the  The Auditor addresses the report to the
shareholders. owner (s) or members.
 The appointment of the auditor is by  The Auditor is appointed by the mgt.

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shareholders and governed by the depending on what needs to be done.
Company’s act.  Auditor is not liable to the 3rd parties.
 The Auditor is liable to 3rd parties if
he/she misrepresents information.  Private audit is not mandatory.
 This audit is mandatory.
 The auditor’s rights and duties are
 The auditor’s rights and duties are limited.
unlimited.  He/she is not fully independent since
 The Auditor is independent, works he/she is influenced by management.
without supervision and influence of
Directors and is not an employee of the
company.  Conduct both audit work and may
 Conducts only audit work prepare accounts.

 Auditor audits only restricted books.

 Auditor audits all documents and books
of accounts  What the auditor proves depends on the
 The aim of the audit is to prove true wish of the owner.
and fair view.

Similarities between Statutory and Private Audit

 The purpose in both is to write a report about the accounts audited and to give advice to
management on Internal Control systems and areas of weaknesses.
 Both statutory and private audit assess the financial position of the enterprises for
purpose of tax appropriation and appropriation of net profits.
 The reports derived from statutory and private audit are used by management for decision
making process.

APPROACHES TO AUDIT

Continuous audit
It is the type of audit which is conducted throughout the accounting period. The auditor is
engaged in the audit work throughout the year. Could be monthly, quarterly, every six months
etc.

Advantages of Continuous Audit

 Early detection of errors and fraud and corrective actions are taken immediately.
 Prevents and minimizes occurrence of errors and fraud at earliest possible.
 It boosts morale of the employees of the firm since they will strive to maintain
accounting records up to date.

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 Audit work will be completed in time hence timely reporting.
 It facilitates timely preparation of interim report. More detailed checking of accounts is
undertaken as the auditor is not under any pressure in conducting audit work.
 The regular presence of the auditor requires that the work of the client to be up to date
and this leads to greater efficiency in the client’s business.
 Audit staff members are kept busy throughout.

Disadvantages of continuous audit

 The auditors may interrupt the accounting work of the employees since they may demand
the books of accounts for audit at any time.
 It is more expensive because the auditor takes longer hours.
 The accounts’ staff may develop a tendency to depend too much on the auditors to
Complete their work.
 This type of audit entails extensive notes taking in order to avoid alteration of figure after
audit since the audited book have to be given back to the accounts staff to continue
recording more transactions.
 This type of audit consumes a lot of auditor’s time.

Safe guards / precautions against these disadvantages:

 The auditor must make clear audit program in order to know where to start audit work
and to know the stages the audit work has gone or how long the audit work will take
per item, per department and per cost centre.
 Auditors should use special symbols and pens for auditing and should make special
ticks in areas that have already been audited. Audited areas should be stamped.
 If any alterations in figures have been detected, the auditor should put a secret tick or
mark against such figures.
 The auditor should make surprised visits to demand to inspect the documents and books
of accounts that have already been audited with the view of checking if there are any
alterations.
 Before carrying on with the audit work in the next session, the auditor should glance
over work done previously to check for any alterations which might have been done
and may not bear any secret tick.
 The auditor should take note of areas he/she has already audited and should keep
copies.
 Impersonal and private ledgers should not be audited until the end of audit work e.g.
Land, assets while the personal ledgers should be checked e.g. debtors and creditors.

Interim Audit
 This type of audit is conducted within the accounting period of the company. The
purpose of interim audit is to make interim reports for instance, for declaration of
interim dividends or can be used for getting loans from financial institutions.
 In case of partnership, interim audit report is used to get the correct net worth to be
paid to a retiring partner or amount of capital that the new partner is to contribute. In

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case of companies, during mergers or amalgamation, interim audited accounts help in
ascertaining the correct value of the assets and liabilities.

Advantages of Interim Audit

 It is ideal for situations under which the company is required to publish figures for paying
dividends or getting loans.
 It facilitates timely completion of final audit.
 Errors and fraud can be discovered at an earlier stage and action taken immediately.
 It acts as a moral boaster on the part of the firm’s employees.
 In case of partnerships, it helps in settling disputes among partners especially when one
partner retires or on admission of new partners.
 It is less expensive compared to continuous audit.

Disadvantages of Interim Audit

 Errors and Fraud may be exposed to the perpetrators and they may attempt to alter figures
in the record.
 It entails too much note taking to avoid alterations.
 The client employees tend to depend on audit staff
 Being an interim audit, questions raised during the period of audit may not be
satisfactorily answered due to shortage of time.
 Due to lack of time, the auditor may not gather enough information to form an opinion
satisfactorily.

Final Audit / Complete Audit

This is the type of Audit carried out at the end of accounting period and continues through
the beginning of the next accounting period. The purpose of this Audit is to make final
reports to the owners or shareholders. During this period of Audit, the Auditor undertakes to
complete Audit once and for all in order to make final reports.

Merits /advantages
 There is no need of extensive note taking as it is the case with interim and Continuous
Audit.
 This type of Audit is flexible as the Auditor can start from any area and is free to change
the audit approaches and methods as circumstances may warrant.
 Chances of figures being altered are minimized.
 It is ideal for small businesses whose transactions are few because they can be audited in
one session.
 No interruption in the work of employees in the Company.
 It is less expensive compared to continuous and interim audit.

Demerits/disadvantages

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 If many firms with the same or similar financial year end, approach the same auditor to
audit their books and accounts at the same time, the work load on the part of the auditor
is too much.
 The Auditor may be forced to work for long hours in the night, or may engage more audit
staff who may not be having experience and this can result into sub-standard work and
false report.
 This type of audit may not meet the need of big and complex Companies.
 Where the internal Control System is weak, it can delay completion of audit in time.
 Errors and fraud are discovered at the end of financial year and this may be too late.

Procedural Audit
 This is an examination and review of the Companies Internal Procedures and records in
order to ascertain their accuracy and reliability as a basis for decision making process.
This type of audit is applicable to big Companies only with Complex operations and the
auditor’s report will cover the following areas.
 Those procedures which should be scraped off of modified.
 New procedures which should replace old ones.

During the audit, the auditor should pay attention to the followings.
 The Company’s Internal Control Systems that is whether it is weak or Strong.
 Check whether laid down guidelines / procedures are followed.
 Check that no changes have been made to the Internal Control System without the
knowledge of the Auditor.
 Ensures that the Company’s records are reliable as a means of preparing final accounts
and as a means for decision making process.

Merits
 This audit provides a feed back to management regarding the procedures which are not
followed, so that the trend is corrected before it is too late.
 The audit reveals procedures which are outdated and uneconomical calling for
replacement or modification to suit the Company’s need.
 The auditor identifies the strength or weakness in the Internal Control System regarding
the procedures and steps to be taken in rectifying them.
 Since this type of audit is part of final audit, it reveals management weaknesses in
supervising the Company’s operations.
 The audit reveals whether procedures in accounting department are working properly to
provide reliable records or not.

Demerits
 It may be more expensive to the Company since the auditor has to spend a lot of time
with the company.
 Management can be frustrated in case there is fear that it will reveal the inefficiency of
the management.

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THE AUDIT LEGAL FRAMEWORK IN UGANDA (AUDIT REGULATIONS IN
UGANDA)

Statutory audits carried out in Uganda are mainly for companies formed under the companies
Acts. Consequently, audit regulations in Uganda make specific references to the Companies Act.
The company Act contains detailed regulations on the following:
 The conduct of an audit especially on procedures that should be followed in
conducting audit.
 The accounting records on which the auditor will work.
 The financial statements on which the auditor will work.
 The auditors’ relations with the company
 Provisions relating to appointment, remuneration and removal of auditor.
The laws that govern audit, the rights and duties of an auditor under the Companies Act, are
principally laid down in Sections 159, 160, 161, and 162.

SECTION 159: APPOINTMENT AND REMUNERATION OF AUDITORS

 Every company should at each annual general meeting appoint an auditor to hold office
from the conclusion of the meeting until the conclusion of the next. Notwithstanding the
provision of sub-sections of this section at any annual general meeting, a retiring auditor,
however appointed, shall be deemed to be re-appointed without any resolution being
passed unless,
(a) He/she is not qualified for reappointment or
(b) A resolution has been passed in that meeting appointing another auditor instead of the
retiring auditor, or providing expressly that the retiring auditor will not be re-appointed or
(c) The retiring auditor has given the company notice in writing of his or her un-willingness
to be re-appointed.
 Where at an annual general meeting, no auditors are appointed or re-appointed, the
registrar may appoint a person to fill the vacancy. In this situation, the company shall
within reasonable time inform the registrar of Companies that no auditor was appointed
at the AGM. If the company fails to give notice as required by the law, the company and
every officer of the company who is in default shall be liable to a default fine.
 The 1st auditors of the company may be appointed by the Board directors at any time
before the 1st AGM and auditors so appointed shall hold office until the conclusion of the
forthcoming AGM.

 The shareholders may at AGM remove such auditors and appoint any other person who
has been nominated by any member of the company and whose nomination notice has
been given to the member of the company not less than 14 days before the date of the
AGM.
 If the directors fail to exercise their power under this section, the company in the general
meeting may appoint the 1st auditors and the said powers of the directors shall cease.

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 The directors are empowered to fill any causal vacancy in the office of the auditors, but
while such vacancy continues, the surviving of continuing auditors may act.

THE REMUNERATION OF AUDITORS OF THE COMPANY

(a) In the case of an auditor appointed by the directors or by the registrar, the remuneration
of such auditor may be fixed by the case may be
(b) Subject to the paragraph above, remuneration of auditors shall be fixed by a company in a
general meeting or in such a manner as the company in the general meeting may
determine.
(c) For the purpose of this sub-section any sum paid by the company in respect of the
auditor’s expense, shall be deemed to be included in the expression of remunerations.

REVIEW AND SUMMARY OF KEY ISSUES UNDER APPOINTMENT AND

RENUMERATION OF AUDITORS
 This section deals with the way auditors are appointed and remunerated.
 The company shall at each annual general meeting at which the accounts are presented
appoint an auditor.
 The appointment is for tenure of office running from the conclusion of the meeting in
question to the conclusion of the general meeting at which accounts are presented.
 The registrar can appoint auditors where at an annual general meeting, no auditors are
appointed or re-appointed.
 Remuneration of an auditor is fixed by the persons appointing in such a manner as the
members may determined.

Section 160: Provisions on resolutions relating to appointment and removal of auditors.

 Special notice shall be required for a resolution at the company’s annual general
meeting appointing as an auditor a person other than a retiring auditor or providing
expressly that a retiring auditor shall not be re-appointed.
 On receipts of notice of such an intended resolutions as said above, the company shall
forth with send a copy thereof to the retiring auditor.
 Where notice is given of such an intended resolutions as stated above, the retiring
auditor makes in respect to the intended resolutions representations in writing to the
company within a reasonable time and request their notification to members of the
company.
 The company shall unless the representations are received too late for it to do so;
a) State the facts of the representations and send copies of the representations to
every member of the company to whom notice of the meeting is sent whether before
or after receipt of the representation by the company.
b. And if a copy of representation is not sent as a foresaid, because the company
received it too late, or because of the company’s default, the auditor without prejudice
to his right to be hard orally, require that the representation be read out at the meeting.
c. If the matter goes to court and the court is satisfied that the rights conferred by
this section are being abused to secure needless publicity for defamatory matter, the
court may order costs on such application.

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 The last foregoing section shall apply to a resolution to remove the 1 st auditors by virtue
of sub-section (5) of the last foregoing section as stipulated in relation to a resolution that
a retiring auditor shall not be re-appointed.

REVIEW AND SUMMARY OF KEY ISSUES AS TO PROVISIONS RELATING TO

RESOLUTIONS FOR APPOINTMENT AND REMOVAL OF AUDITORS
The company’s Act takes serious view of the removal of auditors and there are a number of
special procedures and rules to go through in order to effect a change of auditor these are: -
(a) Special notice shall be sent to members with copy sent to the retiring auditor.
(b) The retiring auditors have a right to make representations on why they ought to stay in
the office.
(c) Companies are required to state notice of representation and send copies to members.
(d) The auditor has a right to receive notice and a right to speak or a right to have his or her
representations read out as at a general meeting at which their terms of office would have
expired or at a general meeting where casual vacancy is to be filled.
 The procedures reserve the right of the members to appoint auditors of their choice in a
general meeting and not by board resolutions. Finally, they also preserve the auditor’s
independence of the directors by not permitting directors who may be in disagreement
with the auditors to dismiss them. The above relates to auditors removable from office
by resolution at the general meeting.
 Alternatively, auditors may merely decline to offer themselves for re-appointment at the
general meeting.
 Whatever way, the auditors depart from office, a statement of circumstances connected
with their departure should be deposited at the company’s registered office and send to all
those required to receive a copy of the accounts.

SECTION 161: DISQUALIFICATION FROM APPOINTMENT AS AUDITORS (S)

 A person or firm shall not be qualified for appointment as auditors of a company unless
he or she, or in the case of a firm every partner in the firm.
(a) Is a member of one of the professional accounting bodies specified in the first column of
the schedule to the accountants or (designation) Act as stipulated in the accountant’s
statute?
(b) Is for the time being authorized by the registrar of companies to be so appointed either as
having similar qualifications and experience.

Qualification for Appointment as an Auditor

 An auditor must be a member of the professional bodies specified in the accountants
(Designations) Act. The following persons are disqualified from acting as auditor:
(a) An officer or servant of the company to be audited;
(b) A person who is a partner of, or in employment of an officer or servant of the company;
(c) A body corporate (Public ltd, co), provided that (b) of this sub-section shall not apply in
the case of a private company.
(d) Reference this sub-section (b) to an officer or servant shall be constructed as not
including reference to an auditor.
 A person who by reason of being an officer or servant of the company or a partner or
servant of an officer or servant of the company, cannot be appointed auditor of the

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company’s holding company or its subsidiary or another subsidiary of its holding
company.
 If any person who is not qualified acts as an auditor of a company, such a person and the
company and every officer in default shall be liable to a fine.

REVIEW AND SUMMARY OF KEY ISSUES RELATING TO DISQUALIFICATION

QUALIFICATION OF APPOINTMENT AS AUDITORS (S)

 The Act aims at ensuring that only persons who are properly supervised and
appropriately qualified are appointed as auditors; and that audit by persons so appointed
are carried out properly with integrity and with a proper degree of independence
 The accountants’ statute also governs the eligibility of the person to be appointed
auditors.
 This section allows individuals or firms to be appointed as company’s auditors but not
body corporates. (Limited Liability Companies)
 The Act is also concerned about individuals who are not members of professional bodies
as specified in the schedule to the accountants (Designations) Act. There is need to
safeguard against such characters and there are quite a number of them around.
 Persons with connections to the company are ineligible to act as auditors to that
company. Consequently, they are also ineligible to act as auditors of the parent,
subsidiary or fellow subsidiaries of that company. The whole purpose of this is to secure
the independence of the auditors from the company. The persons ineligible act as
auditors are:
(a) Officers and employees of the company
(b) Partners or employees of such persons or a partnership
(c) Persons who have connections with the company or where the company has a
connection them.
(d) It is an offence to act as an auditor if one is ineligible and such persons or
company and every officer in default are liable to a fine. The schedule to accountants
(Designations) Act specifies the professional bodies whose members are eligible for
appointment as auditors

SECTION 162 AUDITORS REPORT AND RIGHT OF ACCESS TO BOOKS AND TO

ATTEND AND BE HEARD AT GENERAL MEETINGS.
 Auditors shall make a report to the members on the accounts examined by them and on
every balance sheet, every profit and loss account and all group accounts laid during their
tenure of office, and the report shall contain statements as to the matters mentioned in the
7th scheduled of the Act.
 The auditor’s report shall be read before the company in the general meeting and shall be
open to inspection by any member.
 Every auditor of the company shall have a right of access at all times to the books and
accounts and vouchers/documents of the company.
 Auditors are have a right to require from the officers of the company such information
and explanation as deemed necessary for the performance of the duties of the auditor.
 The auditor have a right to attend any general meeting of the company and to receive all
notices of any other communications relating to any general meeting which any member

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of the company is entitled to receive and; to be heard in any general which they attend
and any part of the business of the meeting which concerns them as auditors.

REVIEW AND SUMMARY OF KEY ISSUES RELATING TO AUDITORS’ REPORT,

RIGHT OF ACCESS TO BOOKS AND TO ATTEND AND BE HEARD AT GENERAL
MEETING
 The 7th scheduled of the act requires the auditor to determine if proper books of accounts
have been kept and proper returns are adequate for the purpose of their audit received by
the company in accordance to their examination.
 These schedules also require the auditor to investigate whether the Final accounts are in
agreement with the accounting records and returns from the branches not visited by them.
 The 7th schedule section (2) requires investigation to be done under schedule 7 section (3)
sub-section (1) of the companies Act to lead the auditor to form an opinion in his report.
If he forms a positive opinion, he needs say nothing on the matter in his report.
 If the auditors fail to get all the information and explanations which are necessary for the
purpose of or the purposes of the audit, he has to say so in his report. (Qualified opinion)

 The auditors have a right of access at all time to the company’s books, accounts and
vouchers and are entitled to acquire from the officers such information and explanation as
they think necessary for the performance of the audit.

 The company auditors are entitled to receive notice of communication relating to any
general meeting, which any member of the company is entitled to receive.
 Auditors have a right to attend any general meeting of the company.
 Lastly, they have a right to be heard at the general meetings which they attend.

SUMMARY OF THE DUTIES OF AN AUDITOR OF A COMPANY

 To make a report to members on all accounts laid before them in a general meeting
during his or her tenure in office.
 To investigate whether or not;
(a) Proper returns have been received from branches not visited by the auditor
(b) Proper accounting records have been kept.
(c) The Final accounts are in agreement with the books of accounts and returns
 To include in the report statement on the accounts regarding:
(a) compliance with the company’s Act and the relevant accounting regulations.
(b) truth and fairness of financial statements.
 To include in the report any instances where the investigations showed that proper books
of accounts had not been kept, proper returns had not been received and that, the accounts
are not in agreement with the books and returns.
 If the auditor fails to obtain all the information and explanations which were necessary,
then he/she must include also that fact in his/her report.
 To consider any information in the directors’ report that are inconsistent with the
accounts and to report the facts if there are such instances.

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SUMMARY OF THE RIGHTS OF AN AUDITOR
 Access at all time to the books, accounts and vouchers of the company.
 Right to require from officers of the company such information and explanations as he
thinks necessary.
 Right to receive notices of and attend meetings and report any matters which concerns
him as auditors.
 Right to make a report to member on auditor’s findings including failure on the part of
the directors and employees of the company to supply all the information and
explanations which were deemed necessary.
In conclusion, the duties seem to be clear and comprehensive however, the Act does not go in
details on how the auditor should go about his investigations and what degree of assurance he
needs about any particular aspect of accounts. To be guided on this issue, the auditors need
to study the pronouncements of the professionals accounting bodies.

AUDITOR’S INDEPENDENCE
The company’s act and the accountancy conventions require that an auditor must be
independent. This means that the work of an auditor is not to be influenced or restricted by
directors. The auditor is supposed to take his or her work freely and plan it as he/she wishes.
The auditor is entrusted with the responsibility of taking care of the interest of the
shareholders and the public; and is supposed to report on how the directors are managing the
finances and assets of the company.

IMPORTANCE OF THE AUDITOR’S INDEPENDENCE

 The auditors are appointed by the shareholders to look after their interest and report back
to them whether Management is managing the company well and for this matter the
auditor is to be independent of the directors and management.
 The companies Act requires that the auditor should be independent so that he or she can
express a balanced opinion on accounts.
 An audit is an independent examination of the books of accounts and this cannot be
possible unless the auditor is independent.
 Those with interest in the company like banks, creditors, government would need to rely
on opinion of an independent person.

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INTERNAL AUDIT
This is part of internal control system which involves the appointment of one or more staff
within the organization, assigned the duties and responsibility of determining whether the
internal control system is well designed and properly operated. The internal audit department is
headed by an internal auditor who is appointed by management and is answerable to
management.

Duties of an Internal Auditor

 Reviews the accounting systems and related internal control system. The internal auditor
reviews the accounting system and ensures that the system is actually is strong and is
working well.
 Ensures that financial records are properly maintained i.e., all transactions are correctly
recorded in the books of accounts and that the control accounts, trail balance and
financial statements are written at the end of the financial year representing true figures.
 To ensure that management policies are being followed and operating normally

DIFFERENCES BETWEEN INTERNAL AUDIT (OR) AND EXTERNAL AUDIT (OR)

Internal Audit (or)
 Conducted on behalf of the management
 This is a continuous work
 It is a continuous exercise conducted throughout the year.
 It is conducted by a competent accountant
 He/she is an employee of the firm
 The amount of work is determined by management
 He/she reports to management
 He/she is part of the internal control system
 He/she is not liable to 3rd parties
 He/she is paid salaries by management/directors
 Does not attend annual general meeting of shareholders
 He/she is not fully independent since his/her work is controlled by the management
 The report is used by management only

External Audit
 conducted on behalf of the shareholders
 it is conducted according to companies Act
 This audit can be conducted periodically or at the end of the financial year.
 The law requires that the auditor must be a qualified professional accountant
 He is an independent external auditor
 The amount of work is determined by companies act
 Reports to shareholders
 It is a legal requirement for company to have an external auditor

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 He is not part of internal management but check on the internal control system.
 Is liable to 3rd parties
 Is paid fees by shareholders
 Attends annual general meeting and makes report to it
 He is independent and not controlled by management
 Report is used by the shareholders and 3rd parties

CIRCUMSTANCES UNDER WHICH THE EXTERNAL AUDITOR CAN RELY ON

INTERNAL AUDITOR
 The nature and depth of the coverage of the internal auditor’s work. When the auditor is
given an unlimited power by management and management can react on his report the
external auditor can rely on his work.
 The external auditor can rely on the internal auditor’s report if the auditor is technically
trained and has the required experiences.
 The internal auditors work can be relied upon if he or she plans the work properly and
have everything properly documented.
 The external auditor can also rely on the internal auditors work if the internal auditors
have some degree of independence.
 The work of internal auditor can also be relied upon by the external auditor if the internal
control system is properly working and strong.
 The quality of the internal auditors and audit clerks may determine where the external
auditor should rely on the internal auditors work or not.

WAYS IN WHICH THE INTERNAL AUDIT DEPARTMENT CAN ASSIST THE

EXTERNAL AUDITOR DURING HIS WORK.
- The internal auditor can point out to the external auditor the weak areas in the internal
control systems so that the external auditor can intensify tests in those areas.
- The external auditor can use the internal auditors working papers to gather evidences
concerning the company’s operations, internal control systems etc.
- The internal auditor can assist the external auditors in explaining the internal control
system used by the organization.
- The internal auditor can observe the following on behalf of the external auditor:
- Stocks taking
- Cash counts and reconciliation
- Wage payments
- Following up of auditor’s correspondences with 3rd parties e.g. debtors and creditors.
- The internal auditors can undertake verification of assets on behalf of the external
auditors.
- The continuous presence of an internal auditor within organization reduces the chances of
- errors and fraud.
- The internal auditor’s presence also safeguards the company’s assets from misuses and
ensures that the company maintains proper books of accounts which is to the advantage
of the external audit.

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PLANNING THE AUDIT/STAGES OF AN AUDIT
1. Negotiation with the clients. When an auditor is given an offer to become an
auditor of the company, the first stage if for the auditor to negotiate with the
clients about the offer and at the same time acquaint himself or herself with the
client’s business.
2. Communicating with the previous auditor(s). Before the new auditor accepts
the offer, he/she must 1st communicate with the previous auditors because of the
following reasons: -
(a) it is necessary to find out why the previous auditor is no longer the company’s auditor.
(b) it is a professional ethics and code of conduct that the new auditor must 1 st communicate
with the retired auditor.
(c) it is important as a matter of courtesy and code of conduct.
(d) it helps the new auditor in obtaining 1st hand information on the financial statements,
areas of weakness, areas where there has been less cooperation etc
(e) the new auditor can find out the fees charged in the previous audit
(f) it assists to get 3rd party information from the file of the outgoing auditor.
(g) it is necessary in order to obtain copies of previous years financial statements.
3. Engagement letter. This is a letter written by the auditor to the clients before
commencing audit work indicating that the auditor has formally accepted to
become the company’s auditor.
4. Making initial investigation. Before the auditor commences his work, he must
1st make a visit to the client and see whether the company is in order and to have a
broad view of the company’s operations. In a nutshell, the auditor must undertake
some kind of research about the company to have a broad knowledge about the
company.
5. Recording the system. During the auditors visits to the company the auditor
should make preliminary investigation obtain the internal control system. He or
she should carry out some tests and try to pin-point and take note of areas he or
she may find problems with during the audit.
6. Evaluating the system. The auditor should evaluate the system using different
techniques such as internal control questionnaires (ICQ), flow charts, observation
etc.
7. Audit tests. These are tests on the accounting records to determine the reliability
and accuracy of the recording system. The auditor has to carry a number of tests
covering the different aspects of the organization.

8. Writing the Management Letter-a letter written to management pointing out the
weaknesses found in the internal control system and operation of the company.
The intention is to allow management respond to some of the queries raised by
auditors.
9. Letter of representation. This contains verbal discussion put in writing
regarding what the auditor had discussed with the company’s management in
response to audit queries raised by the auditor. This letter is written by directors
(management) to the auditors.
10. Writing the Audit Report (opinion)

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Further considerations to be made by the auditor
The audit should consider the following.
- Whether the company has enough resources to meet the cost of auditing if and when the
audit reports are required.
- Should consider whether he (auditors) is related to the client i.e., senior officials and
other members in the management. Does he/she (auditors) own shares of the company?
- Should request the client to communicate with the previous auditor and if the client
refuses to grant this permission, the auditor should decline the offer.
- The auditor should confirm whether his or her appointment meets all the requirements of
the company acts.
- Once the auditor has accepted the appointment, he or she should send to his clients a
letter of engagement.
- The auditor should obtain a list of all books of accounts kept by the clients and the names
of officers who keep such books together with their specimen signature.
- The auditor should arrange an appointment for meeting with responsible officers in the
company e.g. the management director, General Manager, Chief Accountant etc….. of
the company to discuss matters concerning the audit.
- The auditor must examine the accounting system and any weakness must be reported
immediately and corrective actions taken
- The auditor should get written information about the internal control system spelling out
whether it is strong or not and assess the weak areas.
- The auditor should get a list of the entire responsible officer in the company with their
duties, powers, responsibilities and their specimen signatories.
- The auditor should request the management to balance off their books of account and
prepare final accounts.
- The auditor should ask the client to file vouchers in order of occurrence of transaction
and also request the clients to prepare schedule of debtors and creditors.
- The auditor should obtain the last year balance sheet and compare it with the balance
sheet of the current year with particular attention to opening figures brought forward.
- The auditor should get the last year’s audit report and see if recommendations made in
the previous report were actually implemented or not.
- The auditor should obtain the company’s memorandum and articles of association and
see if the company is being operated according to those documents.
- The auditor should prepare an audit Program set according to results of the preliminary
tests and investigations done

LETTER OF ENGAGEMENT
This is a letter sent by the auditor to his client organization after or before commencing the
audit work outlining the scope of the work and it is a letter of acceptance of the offer by the
clients to become their auditor.
For this letter to be of any use the client must acknowledge its receipts and agree in writing
with what is contained therein.

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THE PURPOSE OR OBJECTIVES OF THIS LETTER
- in this letter, the auditor defines the extent or scope of his responsibilities i.e., the scope
of the audit work he is going to perform to the client
- The letter minimizes misunderstanding which may arise between the auditor and the
client.
- It is used to confirm in writing whatever was made verbally i.e., the auditor puts in
writing the agreement of what he or she is expected to do.
- The auditor uses this letter to educate the client on the following issues
(a) it is the duty of the client to prevent errors and fraud by maintaining a strong system
(ICS)
(b) It is the duty of the client to balance of the books of accounts, make trail balance and
prepare final accounts.
- the letter is intended to minimize auditor’s liabilities to 3 rd parties especially in private
audit whereby what the auditor’s work is restricted by his client.
- The letter is used by the auditor to solicit audit evidence from his client.

THE CONTENT OF LETTER OF ENGAGEMENT

- An explanation of what an audit is to the client.
- It highlights the statutory requirements and will govern the audit i.e., to point out that the
audit is being conducted under the companies Act and that it will be an independent
examination on the financial statements or final accounts of the company and that it is the
duty of the directors or management to prepare those final accounts derived from
properly maintained books of accounts.
- The auditor also indicates the method’s he is/she going to use for the audit i.e., whether it
will be system-based audit or vouching audit etc.
- The auditor will remind the client that a management letter (letter of internal control
weaknesses) will be issued at the end of his audit work in case of short comings in the
internal control systems.
- The auditor also reminds his client on how he would gather his audit evidence e.g.,
through 3rd party confirmations, contracts with the banks, creditors etc.
- The auditor states that he will conduct the audit according to the auditing guidelines and
standards and regulations operating in the country.
- The auditor reminds the client that his duty is not to prevent errors and fraud or any other
irregularities but he (the auditor) will plan the audit work in such a way that errors and
fraud can be unearthed or exposed should they exist.
- The auditor will state in the letter of engagement that incase he will conduct other
services other than audit like accounting work or management services, they will be
treated separately or differently from the audit work he is to undertake.
- The auditor clarifies the basis of charging the audit fees.
- A note requiring the client to acknowledge receipt of this letter.

AUDIT PROGRAM
This is a detailed plan of audit work down by an auditor specifying what work is to be done by
whom, when and how and this should be done in a systematic an orderly manner to enable audit
work to be completed comprehensively and in time.
DIAGRAMMATIC PRESENTATION OF AN AUDIT PROGRAM

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Week 1 Week 2 Week 3
Weeks 4 5 Weeks
Day 1-2 3-5 Day 1-3 4-5 Day 1-2 Day 3-5
Day 1-2
1-5
Cash Purchase Sales Creditors’ Debtor Income Trail Board
books ledger and ledgers ledger ledger statement balance and resolution
checked checked by checked checked checked checked balance checked
by……… …………… by…… by……. by……. by…….. sheet by……..
checked
by…………

ADVANTAGES OF AUDIT PROGRAM (REASONS) FOR AUDIT PROGRAMME

- it gives a detail plan of audit to be done from start to completion of the audit
- It provides a record of work to be done and work actually done.
- It approaches the audit work step by step and systematically.
- It ensures that all work is done and it avoids omission of parts of audit by mistake
- It helps the audit staff not to rely on memory.
- It allows the progress of the audit to be followed
- It allows for the audit clerk to sign work accordingly.
- It is a mechanism that allows the auditor to organize her or his work delegate it and
control it.
- It is a means of clarifying communication since it is a set of instructions of what is
expected to be achieved during the audit work.
- It allows for different clerks to be employed on different parts of the audit according to
their abilities
- It carters for gaps created by absence of audit clerks since collogues who replace their
absent counterpart can see exactly where the work starts and where to begin from.
- It avoids duplication or repetition of the same work.

DISADVANTAGES OF AUDIT PROGRAMMES

- work can become mechanical
- it may destroy the initiative of the audit staff to think and plan on their own.
- it may facilitate fraud if the client’s staff are aware of the audit Program.
- the audit clerk may use the audit Program as an excuse for not extending their tasks to
certain areas.
- Audit clerks may stick rigidly to the audit Program and ignore matters which should have
been covered.

AUDIT FLOW CHARTS (To Start from with Business Computing)

These are diagrammatic representations of the company accounting systems and procedures.
Horizontal lines on the flow charts indicate movement of items or documents across

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departments. While vertical lines indicate movement of items or documents in the same
department.

BELOW IS AN EXAMPLE OF FLOW CHARTS FOR PURCHASE FUNCTIONS.

Purchasing/procurement Receiving Stores Department Accounting

Department Department Department
Inspection vs LPO Custody and issue of
stores
x-inspection x-proper
documentations
Key: X Operation of Activities File

THE PURCHASE FUNCTION WOULD GO THROUGH THE FOLLOWING

PROCEDURES
1. The department in need sends the purchase requisition to the purchasing department
2. The purchasing department request for tender from the prospective suppliers followed by
selections.
3. The purchasing department places order through the local purchasing order (LPO)
4. The supplies are received by the receiving department and at that point, goods received
note is raised, copied to stores and accounts department.
5. The goods are put under the stores department custody that will issues them out on
approvals.

USES OF AUDIT FLOW CHARTS

It simplifies the recording of (ICS)
- the auditor gets the whole picture of the company’s operations at the glance.
- It highlights the relationship between the different parts of the (ICS) in a simple
diagrammatic presentation.

AUDIT WORKING PAPERS

These are papers which provide written evidence about the audit/that audit really took place. It
is prepared or obtained by the auditor and retained by the auditor in connection with the
performance of the audit. Audit working papers provide written evidence of all important items
which the auditor comes across during the course of the audit.

PURPOSE/IMPORTANCE OF AUDIT WORKING PAPERS

 It contains records of the auditor’s plan for the current year’s audit.
 It states the nature, timing and extent of the audit procedures performed.

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 It states the conclusion drawn from the evidence obtained as to whether the evidence
represents true and fair view and whether the company complied with all the statutory
requirements or not.
 Audit working papers include all significant matters requiring judgment and
conclusions.

Audit working papers normally include the following:

 The company’s organizational structure.
 Extracts from important legal documents for instance contract agreements, minutes of
board meeting, loan agreements.
 Audit Program
 Completed Internal Control Questionnaires (ICQs)
 Analysis of transactions, balances, ratios and audit procedures applied in the audit.
 Discussions held between the auditor and management.
 Copies of communication with the previous auditor
 Letter of engagement and letter of internal control weakness

Types/grouping of Audit Working papers

Audit working papers are divided into two groupings for filing purposes namely; the current
audit File and the Permanent audit File.

THE CURRENT AUDIT FILE

This is a file which contains information that relate primarily to the current year audit. It
contains information that will be used by the auditor for the current year under audit only and it
is closed at the end of the current year audit.

THE CONTENT OF CURRENT AUDIT FILE

 Audit Program and audit time table
 Completed ICQ’s
 Details of internal control weaknesses discovered during the audit.
 Correspondences in connection with current year audit

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 Record of current verification of balance sheet assets and liabilities
 Matters brought forward from previous audit (recommendations)
 Bank and petty cash reconciliation, stock sheet or stock certificate, results of debtors’
circularization, composition of bad debtors etc.
 Notes taken in connection with salaries, benefits etc
 Audit tests carried out
 Particular points for discussion on completion of the audit work
 Copy of draft financial accounts and balance sheet together with the trail balance
prepared by management.
 Comparative figures for previous year and current year.

THE PERMANENT AUDIT FILE

This is a file that contains information of long-lasting importance or information of continuing
importance to the organization/auditors. The file contains information which auditors will use
beyond one financial year.
CONTENTS OF THE PERMANENT AUDIT FILE
 The address of the company registered premises.
 Copies of vital documents which are of continuing importance to the auditor for example
letter of engagement, minutes of meetings of shareholders/directors, lists of share holders,
debenture agreement, title deeds and organizational chart.
 Organizational structure showing the principal departments and sub-divisions with short
descriptions of responsible people together with their duties and the channels of flow of
communication/documents.
 A list of all books and other records and where they are kept by he company.
 An outline history of the company showing details about share capital, reserves,
debentures etc.
 Methods and system of accounting used by the client company for example the
accounting polices relating to valuations of stock, depreciation, bad debts etc
 A list of directors with their shareholding and duties
 A copy of internal control system procedures

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 Addresses of potential customers/suppliers.
 Copies of management letter and letter of representation
 Copies of international accounting and auditing standards applied in the audit.
 Index to the file

INTERNAL CONTROL QUESTIONNAIRE

These are questions prepared by the auditor and given to his client to be completed in order to
appraise the Internal Control System to ascertain the strength and weaknesses of the system.
These questions require short answers like yes or no or not applicable. The answers provided
would enable the auditor to assess whether the internal control system established by
management is strong and reliable or very weak. If the internal control system is very weak, the
auditor will be prompted to conduct more detailed and intensive audit tests and work.

MERITS OR USES OF INTERNAL CONTROL QUESTIONNAIRES (ICQs)

They assist the auditor to know whether the books kept by the client and the information
contained in them are reliable for decision making or not.
 The ICQs enable the auditor to assess whether the ICS is weaker or not
 It reveals or indicates the officers the auditor should consult incase of difficulties.
 The ICQs are a basis for writing management letter so that corrective actions are taken
against weaknesses discovered.
 They assist the auditor in drawing up a focused audit Program accordingly.
 It is also used for future reference by the auditor to find out whether there has been
improvement in the (ICS) or not since the previous audit.
Demerits of ICQs
 They can be mechanically answered without thinking of what answer to be given. Wrong
information can therefore be given to the auditor. The auditor should therefore use them
cautiously and should be very careful when framing the questionnaires.
 There is a danger that the auditor can use standard questionnaires for assessing two or
more firms yet firms are never the same. This may also generate misleading information.
Questionnaires need to be developed while taking into consideration the different
business environments.

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 When the ICQs are used year after year without reframing them, they can be misleading
since the firm management might have undergone some changes.
 If the questionnaires are framed in such a way that they give biased answer then they will
be of no use.
 In some cases, the ICQs are considered to be shallow techniques for assessing the
Internal Control System of organizations. (Need also to have some interviews).
 When it is answered in a rush just to beat time, it may give wrong impression and not the
real situation on the ground.
 The application of ICQs is only ideal for big companies and not suitable for assessing
Internal Control System of small companies

AUDIT EVIDENCE
It is a requirement of the Companies Act and the International Auditing Standard number 1
that the auditor should obtain sufficient, relevant and reliable audit evidence to enable him or
her draw appropriate/objective conclusions.
Audit evidence therefore consists of any information used by the auditor to arrive at
conclusions necessary for making opinion. Audit evidence are categorized into three broad
types of sources and these include the following: -
1. Primary audit evidence
This is the type of evidence which the auditor gathers by himself or herself from within
the company. The evidence in this category is corroborated from the accounting records,
vouchers, books of accounts, internal policy documents and other relevant information
required from the management of the entity under audit.

2. Secondary audit evidence

This refers to audit evidence which the auditor gathers from outside the company. Such
pieces of evidence are gathered from third parties like debtors, creditors, bankers, trustees
etc. It is generally believed that this type of audit evidence is much more reliable than the
primary audit evidence, because they are fee from manipulation of management.

3. Hear-say audit evidence

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These are gathered from such sources like informal interviews, conversation, and
interactions with lower-level employees of the company and with senior staff of the
company. If is about a community project then auditors talk with the community
members.

WAYS OF GATHERING AUDIT EVIDENCE / WAYS OF COLLABORATING AUDIT

EVIDENCE

There are four major ways of gathering audit evidence and these include vouching, verification
of balance sheet items, observation or physical inspection and re-computation of figures.

1. Through vouching of entries.

This is a process by which the auditor examines vouchers to see whether:
a) Invoices attached actually are for the business
b) They have been duly approved and authorized
c) They are for the current financial year
d) They are properly recorded in the books of accounts
A voucher is any documentary evidence in support of a transaction recorded in the books of
account. This means that the auditor will try to substantiate the validity of the information
contained in vouchers representing transactions.

2. Verification of assets and liabilities (Balance sheet Audit)

In Balance sheet audit verification means the auditor scrutinizes all assets and liabilities
appearing in the balance sheet for purpose of establishing four main things.

Ownership
This aims at ascertaining that the assets and liabilities appearing in the balances sheet actually
belong to the client company. When checking for the ownership, the auditor checks the
Shareholders’/directors’ minutes books to see if the acquisition of fixed assets and long-term
liabilities had been sanctioned by competent authorities. Furthermore, the auditor checks the
cash books to confirm whether the assets were actually bought or liabilities acquired following
the recommended procurement procedures.

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The auditor also checks the client’s ledgers to see if the assets and liabilities have been recorded
appropriately. These procedures (tests) will enable the auditor to certify for himself or herself
that these assets and liabilities are actually owned by the company.

Value
The net book value of assets and liabilities carried forward at close of every financial period need
to be carefully revisited and confirmed. This is test is achieved by referring to the historical cost
of acquisition and subjecting the same to the company’s depreciation policy over the years then
arriving at the net book value. This information should be summarized in the assets’
depreciation schedules.

Existence
The auditors should confirm if the Assets referred to in the financial statements really exist and if
they exist their reported net book value need to be confirmed. This is done through physical
inspection of the assets.

Description
The full description of the assets and liabilities appearing in the balance sheet should be revisited
So that consistency in details as authorization and acquisition are maintained in order to avoid
loosing resources or money of the organization. It is not proper to have an asset of a certain
description being authorized to be purchased but an asset of completely different description is
bought. This raises suspicion of fraud.

3. Through observation
This is the most appropriate for gathering evidence surrounding the company’s operations and
procedures and the way of handling assets and crucial activities of the company.
Observations can be applied in the following situations:
 Mail opening
 Wage payments

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 Counting of cash especially petty cash at hand
 Stock taking

4. Checking and re-computing.

 The auditor will have to check and recomputed arithmetic accuracy of the transactions,
e.g. trail balance, depreciation, good will and Bank reconciliations.
 Using comparisons where the auditor will compare records for the current year with
budget and previous period to check if there had been significant changes.
 Agreeing the trail balances with the accounts
 Financial analysis, the auditor analyses the performances of the company using ratios
analysis.

AUDIT TESTS
In the process of actual auditing the auditor conducts a number of tests/procedures on books of
accounts, vouchers and the general operation of the company under audit. The major tests carried
out include the following tests
1. Compliance tests
2. Substantive tests
3. Walk- though tests
4. Systems tests

COMPLIANCE TESTS
These are tests to confirm if there is compliance with regulations, standards, policies and
procedures in place. It seeks to provide audit evidence that the internal control procedures are
sound and are being complied with as prescribed. When carrying out compliance tests, the
auditor uses internal control questionnaires (ICQs). The (ICQs) aim at checking if the internal
control is effective and being complied with in the day-to-day running of the organization.
When the auditor finds out that the (ICS) is strong enough then the next stage is to take sample
of transactions to test whether the systems installed are indeed working. This auditor tests the

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whole system of transaction to find out whether the internal controls regarding particular
transactions are being followed or not. The auditor also checks for compliance with accounting
regulations and reporting standards, policies etc.

SUBSTANTIVE TESTS
These are tests on transactions and balances, seeking to provide audit evidence relating to the
completeness, accuracy and validity of the information contained in the accounting records or in
the financial statements. These are tests to substantiate the validity and accuracy of transactions
reported. These are tests which seek direct evidence that all transactions, balances, assets and
liabilities or any other items recorded in the books of accounts are accurately recorded, are
complete and that the information provided are valid.

WALK THROUGH TESTS

These tests are used to ascertain the correctness of descriptions in the internal control system.
The tests seek to find out whether such descriptions had not changed since the last audit. The
auditors select a few transactions and check through them from initiation stage to the end to
confirm if guidelines laid down in (ICS) had been followed.
SYSTEM TESTS
These refer to those tests which the auditor uses to check whether the systems in accounting and
internal control have not been changed. The auditor checks the organizational Chart then select a
few transactions to see if the controls regarding them have not changed. Should there be
unsanctioned changes in the accounting system without the notice of the auditor, audit quarries
would arise.

APPROACHES FOR SAMPLING IN AUDITING

There are two major approaches or method sampling in auditing namely:
1. Judgmental sampling
2. Statistical Sampling

JUDGMENTAL SAMPLING
This refers to the process of selecting a sample of transactions of appropriate size for audit
purpose on the basis of the auditor’s judgment of what is desirable. The auditor does not use

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scientific methods of sampling transactions to be audited rather he/she uses judgment and
experience when selecting the sample size for auditing.

MERITS OF JUDGMENTAL SAMPLING

 This method has been used by many auditors for many years hence, it is well understood
and refined by experience.
 It is a simple method, since the auditor uses, he or her judgment and experience
 No special knowledge of statistics is required.
 No audit time is spent on complicated mathematics and statistical calculation than
auditing

DEMERITS
 It is an unscientific method of sampling
 It is wasteful in terms of time since the sample size may be unnecessarily too large
 No accurate quantitative results are obtained
 Personal bias in the selection of the sample is inevitable.
 There is no logic used in the selection of the sample size making the process very
subjective.
 The conclusions arrived at on the basis of the evidence from the sample is vague
because it is based on the feeling of “it seems to be okay”.

STATISTICAL SAMPLING
 It is scientific and more accurate
 It provides precise mathematical statement about probability of being correct.
 It leads to reasonable size of samples being taken.
 It tends to cause uniformity/standards among different audit firms.
 It can be used by lower grade audit staff especially the staff may be unable to apply the
judgment and experience needed in judgmental sampling.

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NB: Given the information above, it is important to note that judgmental sampling is still the
most preferred methods by majority of the auditors. This is because the auditors have to weigh
the situation accordingly in order to get a lot of audit evidences and are to investigate many
things at the same time. This therefore, makes judgmental sampling to be preferred by many
auditors than statistical sampling.

MANAGEMENT LETTER/ (LETTER OF INTERNAL CONTROL WEAKNESSES)

 This is a letter written by the auditor and send to management/Board of Directors of the
client/firm drawing attention to key weaknesses identified in the internal control system.
The purpose of the letter is to put on record the internal control weaknesses that the
auditor has come across during the audit.
 The auditor points out the errors and fraud and any anomaly they came across during the
audit.
 The auditor gives suggestions on how those internal control weaknesses should be
prevented. This letter is sent after the interim audit or complete audit in principle, when
the auditor is about to write his report.
 The Auditors and management would then have a session/ meeting to give opportunity to
management to respond to those issues raised.

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TEEMING AND LADING (CARRY-OVER FRAUD)
Introduction
This is a process in which the cashiers or accountants/management may misappropriate
resources in general and cash received from debtors and go ahead to falsify the debtors’ records
by writing off huge cash discounts or keeping the accounts open and later on writes off the
accounts as bad debts. Sometimes, after committing such a fraud, the cashier may receive cash
from another debtor and then split the amount into two and part of the amount, the cashier’s
records in the accounts of the debtors whose cash the cashier had already received and
misappropriated the remaining portion of the cash is recorded in the account of debtor who had
just made payment. The remaining balances would be written off as bad debts yet actually no
bad debts have arisen from the debtors whose accounts are being tampered with.

PREVENTION/DETECTION OF TEAMING AND LADING

 There should be proper segregation of duties such that the cashier should not have access
to debtors’ ledgers.
 Proper control account for general ledger/debtors account should be maintained and this
should be done by an officer who is neither the cashier nor an officer who maintains
debtor ledger.
 There should be proper control maintained in the mails office and mails should be opened
in the presence of mails officers. All cheques found in the letters should be crossed
immediately and marked “account payee only”.
 A temporary cash list for all cheques/cash received should be made and total up there and
then. This list should be forwarded to the cashier along with the cheques and the cashier
should write receipts for the cheques amount received.
 Regular bank reconciliation statements should be made to reconcile balances as per bank
statements and cash book. It is important to check and verify banking in order to ensure
that banking is done promptly.
 The responsibility of giving cash discount or writing off bad debt should be performed by
responsible and senior officers who should never have access to the debtors’ ledger and a

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list of all customers to whom cash discount have been given or on whose bad debts’
accounts had been written off should be made and reconciled with the debtors’ ledger
 Debtors’ circularization should be regularly done to confirm the balances indicated on
debtors’ account. Responses to debtors’ circularization need to be simple and straight
forwarded as illustrated below.

1. Negative response i.e. when the balances do not agree, the debtor will respond
“no”
2. Positive when debtors agreed with the balance indicated, they respond “yes”
3. There should then be space for personal comment of the debtor:
Comments__________________________________________

CUT OFF PROCEDURES (On Closing and opening balances)

These refer to audit procedures or tests carried by auditors to ensure that the value of closing
stock reported is accurate and reliable.
These are the procedures through which the auditor ensures that, the closing stock remaining in
the stores and the value of closing stock brought forward in the final account namely the income
statement and the balance sheet is the correct amount.
 Through these procedures the auditor should ensure that any goods sold but still
remaining in the stores undelivered should be excluded (deducted) from the closing
stock.
 The value of any stock kept in the stores for 3 rd parties should not be included in the
closing stock figures, however, for goods sent on consignment and being held by agents;
there value should be included in closing stock.
 Any goods ordered and advice notes or delivery notes for them have been received before
the end of the financial year should also be included in the value of the closing stock
although the goods
 The auditor should carry out the following tests;
 Should verify last sales invoices against delivery notes to see if all sales invoices have
been delivered. Undelivered sales invoices should be deducted to ensure that the value of
closing stock reported is correct

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 Goods return notes and credit notes should be included in the value of closing stock.
 Goods received at end of accounting period should be added (included) in the value of
closing stock.
 For any goods returned to suppliers (returns outwards) should be excluded (deducted)
from the value of closing stock.

AUDITING WAGES AND SALARIES

In order to carry an effect audit in any area of the organization, the examiner should first have a
thorough understanding of the standard internal controls that should be in place. Audit is simply
to confirm if those controls exist and if they are followed.
Specific internal control objectives of wages and salaries include the following:
Any good internal control system over wages and salaries should achieve the following
objectives:
(a) To ensure that there are proper procedures in the engagement and discharge of
employees as well as issues relating to their promotions and transfers.
(b) To ensure that there are proper procedures for recording workers attendance and job
time.
(c) To ensure that the payroll for wages and salaries are accurately prepared as per
guidelines and regulations in place.
(d) To ensure that wages are computed only in respect of actual employees and at authorized
rates and in accordance with hours worked.
(e) To ensure that wages are paid out to the correct employees not to ghost employees.
(f) That there is accurate entering of wages and salaries transactions in the books of account
and proper analysis done across to the correct accounts.

FEATURES OF INTERNAL CONTROL OVER WAGES AND SALARIES

A good internal control system over wages should have the following features.
 All employees for the firm should be centrally recruited. There should be only one
department, possibly the human resource and personnel department to be fully
responsible for recruiting all employees for the firms.
 The human resource and personnel department should maintain detailed records about the
employees of the organization. Such details may include among others names of
employees, employment number and ID, terms of employment, wage rate to be paid,

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promotion, retirement, dismissal, specimen signatures, employee photographs and names
of their next of kin.
 In preparation of the payroll, names of workers should be written in the order
corresponding with that of the human resource and personnel department. This list
should be prepared in reference to the employment numbers, hours worked or piece of
work done, rate per hours or work total hours worked, total gross pay deductions and net
pay.
 The person preparing the payroll must submit it to be checked by his or her supervisor
and the supervisor should sign to confirm that the figures are correct.
 The persons preparing the payroll should be different from the persons who withdraw
money from the bank. The persons paying wages should not be the same persons who
prepare the payroll or withdraw money from the bank.
 Payment of wages should be properly supervised and employees should be properly
identified at the time of payment. The employees should be issued identify cards by the
personnel departments for this purpose. Every employee should sign against his or her
name and the supervisor should be present on the day of payment to identify employees
under him or her before they receive their pay.
 No supervisor should be allowed to take and keep salaries for absent employees under
him or her. For those absent, there pay should be kept by the salaries department and
should be taken back to the banked immediately where applicable.
 For those workers who receive their pay through bank accounts, their payment vouchers
should be prepared by one officer and authorized by another officer. The authorizing
officer must ensure that only the correct workers in the firm are the ones whose names
are appearing on the payroll.
 The auditor must check the names of employees appearing on the payroll to find out if
there are new names as compared with the payroll for the previous month and should also
check to ensure that names of employees on the payroll are the ones with the personnel
department.
 The auditor should check employee’s names against their employment numbers in order
to ensure that they are the rights ones against the right rate of pay, total amounts to be

44
paid and this should be compared with details of the previous month payroll. If there are
changes, the auditor should seek clarification from management.
 Management should ensure that there is internal audit department charged with the
responsibility of ensuring that payrolls are properly made; a proper procedure for
payment of wages are followed. The internal auditor should ensure that workers are
identified during payment day.
 Payroll summary, journal and vouchers should be checked before posting to the accounts
in the ledger.
 In case of wages unclaimed on the date the payment; the auditor should seek clarification
in respects to their absence. If there are new names included in the present months’
payroll, or if the specimen signatures for workers are different from those on the payroll,
the auditor should take it that the wages were paid to ghost workers or employees and the
auditor should go ahead to seek clarification from the officials who prepare the payroll.
The auditor should also seek clarifications on the same from supervisor who submit the
names of employees in that section and the supervisor who always authorize payment of
wages.

HOW GHOST/DUMMY WORKERS CAN BE IDENTIFIED BY THE AUDITOR.

Key behaviors of Suspected Ghost employees
 Ghost/dummy workers will not re-compute or count the amount of cash and cheques paid
to them, but go away very fast.
 They are shy or nervous when receiving the pay.
 They don’t socialize freely with other fellow workers on the day of payment.
 Ghost workers tend to hesitate in appending their signature or thumb print.
 Always come for payment last or in privacy.

DETECTION OF GHOST/DUMMY WORKERS FROM PAYROLL

The auditor may carry the following tests in the process of auditing wages:
 Compare human resource and personnel records with the wage sheet for consistency.
 Request for identification cards from causal workers and compare them with details on
the payroll.

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 Check signatures of workers of different periods for consistency. Note that the signatures
of ghost workers will not always be consistent.
 The auditor should check the payroll for different periods and where some names do not
appear in the different wage sheet or payroll and therefore further investigation must be
instituted.
 The auditor should pay surprise visits on the day of pay and observe the process of
payment of wages and ensure that wages are only paid after producing identity card.
 Compare the list of names on the payroll with that given by the sectional supervisors with
the list given from the personnel or human resource department. If there are differences
in the names and other details, such differences must be investigated especially where the
names appear in payroll but not appearing in list given to personnel and human resource
department.
 The auditor should compare the current payroll with those of the previous months, and
any names appearing in the current payroll but not appearing in the previous payroll
should be investigated.
 Compare the actual total wages in the payroll with budgeted wages and seek explanations
for any variation.
 Check the leaves registrar to ensure employee who took leave are not paid twice before
and after leave.
 Ensure that the names of a given employees do not keep on appearing under unpaid
wages list always. This would raise suspicion of such an employee being a ghost
employee.
 Examine the employment procedures to see if they can give room for ghost workers
 Finally check the signatures of the employees on the specimen’s signatures cards
maintained by the human resources and personnel department or those appearing on the
identity cards with the ones appearing on the payroll. Any differences discovered should
be investigated.

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INTERNAL CONTROL QUESTIONNAIRES DEALING WITH WAGES
These are possible questions that can be put across to the members of the entity to assess the
strength of the internal control system over wages and salaries in an organization. The issues
presented below form the gist of enquiry into the ICS over wages and salaries.
 Who has the authority to engage or dismiss employees of the company?
 Who maintains records of all employees and do such records contain employees’
signatures?
 Is over time work requested for and approved by higher authority/supervisor or an
employee can decide to have over time at will?
 Who is responsible for authoring overtime and general increase in pay?
 Is the authority for overtime always made in writing?
 Is the person with the authority different from the one who prepares the payroll as
well as the ones paying out salaries?
 what records are usually maintained for time rates and peace meal?
 If jobs cards or work cards are produced, who confirms their accuracy and validity?
 Who is responsible for preparing the payroll?
 Is the person who prepares the payroll the same person who prepares the list for
wages?
 Is the payroll checked and authorized by responsible officers before wages are paid?
 Is the authority evident in writing and does the signature and official stamp of the
officers authorizing appear on the payroll?
 Is the cheque drawn for payment of wages for gross or net amount?
 If it is gross wages drawn how does the company deal with the cash in respect of
deductions?
 Is the exact amount of cash required for wages withdrawn from the bank or not on the
same cheque?
 Are those officials who distribute wages completely independent from those who
prepare the payroll?
 Are written authority always required from the representative of absent employees
before they can receive the salaries of the absent person?

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 When are the unclaimed wages usually recorded?
 Who is responsible for the retention of unclaimed wages and for how long are the
unclaimed wages retained in the company before being re-banked?
 Who usually authorizes the payment of unclaimed wages?
 Do both the payee and the person paying sign at the time payment is made?
 Are there any deductions made and which ones are those?
 How are these deductions dealt with to ensure that they are sent to the right
destinations?

INTERNAL CONTROL SYSTEM OVER PURCHASES AND CREDITORS (to start from
here)
Fraud can also be committed in the process of purchasing goods for an entity.
A good system of control over creditors and purchase should meet the following requirement.
 Goods and services should only be requisition for by authorized employees and such
employees must have limits set for making requisitions.
 Authorized requisition limits will increase with the level of authority. Goods of
smaller amounts can be ordered for, by junior officers but goods of larger values
should be ordered by those of higher authorities like the directors and perhaps
following the tender process governed by procurement laws.
 Requisitions and purchases notes should be serially numbered and controlled.
 The Purchases order should be raised only when requisitions for them are received
and authorized.
 Goods received should be recorded and should be compared with details in the
purchase order.
 When purchase invoices are received from suppliers, they should first be checked for
authentication in respect to accuracy, pricing, discounts given and any other
deductions involved.
 Once invoices are received, they must first be pre-numbered and then verified against
purchases orders and requisitions before being authorized by a responsible officer and
passed to accounts department for payment.

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 There should be proper segregation of duties in regards to store departments,
purchase department, maintenance of Creditors ledgers, Cash receipts and cash
payments. All these departments should be independent of one another and should be
managed by qualified persons.
 Purchase ledger should be periodically reconciled by making use of creditors control
accounts techniques.
 Cut-off procedures should be carried at the end of the year.
 There should be proper coding of purchases of goods. A list of all purchases orders
should be maintained and once theses orders are made they should be ticked against
their period.

STEPS AN AUDITOR SHOULD TAKE WHEN AUDITING PURCHASES

When auditing purchases and creditors the auditor has to apply certain techniques and tests in
order to draw up conclusions regarding purchases and creditors. The auditor has to perform the
following tasks and tests:
 Check Internal Control System (ICS) in regards to purchases while paying particular
attention to the process involved in ordering for goods, authorization of the purchases,
receipt of the goods, storage of goods received and eventual dispatch.
 Select a few copies of purchases orders and see if they comply with the recommended
internal control procedures.
 Select a number of invoices and check the amount and compare those figures with the
ones in the purchase orders. Check and see if invoices are 1 st checked for arithmetic
accuracy, discounts and other educations to ensure that they are authorized before
payment are made.
 The auditor should also check to ensure that vouchers used for paying those invoices
are cancelled along with the invoice so that they are not used for 2nd time.
 Check the goods received notes and goods returned notes for reconciliation.
 Trace that invoices received are recorded against purchase order and in the ledger.
Also check the total of purchase to ensure that they appear in the trading, profit and
loss account for the year. Ensure that creditors’ control accounts are regularly taken
from the ledger.

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 Check to ensure that there is proper segregation of duties in regards to purchase
orders, receiving of goods, maintaining creditors’ accounts, making payment. All
these should be handled by different people.

BALANCE SHEET AUDIT

This is the process of verifying the items appearing in the balance sheet to ensure that they are
not misstated. The items that appear in the balance sheet are basically ASSETS and
LIABILITIES. Balance sheet audit is therefore referred to as Verification of assets and liabilities.

VERIFICATION
Verification is the process by which the auditor physically checks and verifies the ownership,
Value, Existence and Description of assets and liabilities. Actually, the Auditor is concern with
these four major issues during balance sheet audit.
 Verification of assets and liabilities is very important in that although the assets may be
supported by title deed and appear in the balance sheet, they may not exist at all.
Alternatively, they can be sold away immediately they are bought and they may still
appear on the balance sheet. Hence, verification is very important because the auditor can
actually confirm that the assets exist and that they are not over or under valued.

STEPS TO BE FOLLOWED WHEN VERIFYING ASSETS

 Check the assets account and compare the figures with the ones appearing on the balance
sheet.
 Verify the physical existence and state of the assets by actually inspecting them.
 Certify the value of the asset being carried by checking the cost value from the date of
acquisition then wok out and truck down the method of deducting the total depreciation
(Accumulated dep.). In case the cost value cannot be accurately ascertained, engage an
expert or a valuer. (Checking and re-computing)
 Ensure that the assets are free from any charge or external claim. There should be no
claims or liabilities against them.

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 Ensure that the assets were acquired by the entity by examining the board resolutions
sanctioning their purchase. Ownership can be confirmed by looking at documents like
receipts, title deed, transfer letters, log books etc.
 Request the client to produce the log book or the assets register which should contain
among others; cost of assets, opening balances, any additional purchases, any disposal,
depreciation and the Net book value of the Assets.
OWNERSHIP:
When checking for ownership of the assets, ascertain the followings:
 Who gave the authority to acquire assets and liabilities?
 Inspect the title deeds, certificate of ownership, agreement or contract to ensure that they
are all written in the name of the client company.
 If the above documents are being held by third parties, the circumstances must be
explained whether it is being done just for safe custody or as collateral security. If they
are kept by the bank or by the company lawyer then it should only be held for safe
custody but not for any claim at all.
 Request a letter of representation for assets whose ownership cannot be verified
physically.

VALUE:
 The auditor should take the cost of the asset and deduct the total depreciation to date as
per the depreciation method adopted by the company.
 Where there are difficulties, engage experts to ascertain the actual value.
 In case of additions and disposal, they should be adjusted in the assets accounts to get the
actual net Book value.
 In case the asses appreciate, like free hold land and building the fact should be noted but
the asset (land) should be recorded in the books of account at the historical cost of
acquisition.

EXISTENCE
 Physically inspect the assets to ensure that the actually exist.

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 Where the assets are not physically present, obtain a letter of representation from the
director that these assets are at different sites without any claims.

DESCRIPTION:
All details and specifications of assets should be recorded and maintained.
Full description of the assets and liabilities of a company should be kept and disclosed. Fraud
can easily be committed in respect to description of assets and liabilities. The details of the type
of asset desired and sanctioned for purchase should be the same with the details in the Local
Purchase order, Goods delivered notes as well as with details in the inspection report. Variation
in these details raises a lot of suspicion and consequently audit queries.

INTERNAL CONTROL OBJECTIVES FOR ASSETS:

The purpose of internal control procedure over assets is to attain the following objectives:
 To ensure that the acquisition of fixed assets was actually authorized.
 To safeguard assets against misuse or theft.
 To ensure that proper records of assets are maintained.
 To ensure assets are depreciated over their useful life at reasonable rate.
 To ensure that profits or losses on disposal are fully accounted for.
 To ensure that disposal of fixed assets are not fraudulent.

INTERNAL CONTROL MEASURES FOR FIXED ASSETS:

 All fixed assets should be purchased through board’s resolution or should be authorized
by shareholders in their AGM.
 There should be adequate security over fixed assets and there should be limited access.
 Leasing of Assets must be authorized either by Board or shareholders.
 Fixed asset registers should be maintained, showing the cost of assets, model and serial
number of the asset, location, responsible officer, depreciation etc.
 There should be regular checks by a responsible officer to ensure that the assets are not
misused.
 Disposal of assets can only be authorized by BoD or shareholders in the AGM.

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VERIFICATION OF FREEHOLD LAND AND BUILDING:
This refers land or buildings free of any external claims. When verifying freehold land and
building, the auditor should check the followings:
a) OWNERSHIP: Check that the client has got ledger records on land and building it has.
Also check the director’s book for the list of land and building existing at the beginning
of the accounting period. Get a certificate from the directors to confirm that the freehold
land and building appearing on the balance sheet, actually is owned by the firm and free
from any claim, like loans.
.
b) VALUE: The auditor should check the value of land and building as indicated in the
director’s minute’s book. Compare this with the value in the ledger records. The auditor
should get an expert or valuer to get the correct value of land and building. In case the
value of the land and building has appreciated, the auditor should get a certificate from
the director stating the reason for such appreciation. In case of buildings which depreciate
in value, ascertain the cost of the building and calculate the total depreciation to date in
order to arrive at the net value of the building.
Compare the net value calculated with the value appearing on the balance sheet. If the
building was constructed by the constructor, check the contract agreement for the correct
value of the building. Sometimes write directly to the contractor to get the correct value
of the building. In case of land, get a certificate from an independent valuer or refer to
the deed to get the correct value and compare with the figure appearing on the balance
sheet.

c) EXISTENCE: Physically check that the freehold land and building actually exist.

d) DESCRIPTION: All details and specifications of assets should be recorded.

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LEASE HOLD LAND AND BUILDING:
Lease refers to a situation when the firm can use the land and building as security for borrowing
funds from third parties like commercial banks, insurance company, and building societies. The
land and building are leased out for a certain capital sum of money. During its period, the
company pays out interest and at the end of the lease period; the assets are re-possessed by the
firm. During the lease period, the leased assets are actually owned by the leasor. When verifying
leased hold land and building, the auditor should check the followings:
a) OWNERSHIP: Check on the lease agreement to ascertain who owns land and building.
Also confirm with the lawyers with whom the lease agreement is being held for
ownership of land and building.
b) VALUE: Check the lease agreement in order to ascertain the value leased.
c) EXISTENCE: Check the contract agreement or agreement in order to ensure that the
lease actually exists. Check through the cash book or bank statement for the amount
which was transferred to the client’s account in respect to the lease.

AUDITING LOANS FROM COMMERCIAL BANKS:

Usually if a company receives a loan, it must first be sanctioned by the directors or shareholders
in their AGM. The power for borrowing must be indicated in the company’s Article of
Association and it must be used according to the object indicated under the object clauses in the
memorandum of Association. When the auditor is auditing loans appearing on the balance sheet,
he or she should check that the directors didn’t exceed their powers to borrow loans as indicated
in the Article of association and such loans should be used only for the purposes indicated. The
auditor should check the followings:
a) OWNERSHIP: Check the directors’ minutes book for the authority given for borrowing
loan. Check the loan agreement with the commercial bank to find out more details about
the loan. The auditor should also check the cash book and bank statement to confirm that
the loan was actually given to the firm. Incase land and building were pledged for the
loan, check that such pledged assets actually were owned by the firm.

b) VALUE:

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Check the directors’ minutes book for the amount of loan they had approved to be
borrowed from the bank. Check the cash book and the bank statement for the actual
amount received from the bank in respect to the loan. Compare this value with what is
appearing on the balance sheet.
c) EXISTENCE: Check the loan agreement and compare the loan period with a letter
received from the bank (bank confirmation) that the firm has not yet repaid the loan.
Confirm directly with the directors and the bank if the loan has not yet been repaid. I.e. it
exists.

AUDITING STOCKS
Stocks appearing on the balance sheet include:
 Raw material
 Work-In-Progress (WIP) or simply unfinished processed materials
 Finished products.
 Unused supplies and materials like stationary etc.
When the auditor is verifying stocks, he or she should check for the followings

 OWNERSHIP: Check that the stocks reported are being held in the client’s stores. Also
check the client’s purchases order against goods received notes, stores records, goods
processed sheet to ensure that they are all written in the name of the client.
 VALUE: In case of raw materials, and other store materials, check the bin cards and
stores ledger and calculate the value of those materials in stores. Also check the stock
taking sheet for the value indicated to be held in stores. For work in progress, check the
methods used for issuing materials to production department. Find out whether the
methods recommended were followed or left out. Calculate the value of work in progress
and add any other costs incurred in processing materials like wages and other overhead
cost. For finished products, ascertain the total cost incurred in manufacturing and storing
the product.

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 EXISTENCE: Check that these stocks actually exist in the stores.
 NB: All stocks being held in the stores for the third parties should have their values
subtracted from value of stock in the stores. For stocks being held by another party on
behave of the client’s firm should have their values included or added to the value of the
stocks in stores.

THE AUDITOR’S REPORTS:

At the end of the audit work, the auditor is supposed to write an audit report on the financial
statements audited namely:
 Income Statement or the Trading, Profit and Loss Account.
 Balance sheet.
 Funds flow statement.
The auditor will draw conclusions basing on three major issues:
 Whether proper books of accounts were maintained or not.
 Whether the Auditor received all the necessary information required for the purpose of
proper audit or not.
 Whether the statements, present true and fair view of the state of affairs of the company
as at the end period or not.
The auditor addresses the report to the shareholders who had appointed him or her.

Features of the Auditor’s Report

The auditor’s report should bear the following key features.
1. Should be dated and the date should be the date when the directors finally approved the
audited financial statements.
2. Should be addressed the shareholders.
3. It should identify the financial statements audited (Income statement, Balance sheet,
Funds flow statement)
4. Should indicate auditing standards applied or followed during the auditing process.
5. Should state in his or her report an opinion for example, “In our opinion………..” the
financial statements represent a true and fair view of the state of affairs of the co.

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6. The report should state whether all the information and explanation necessary for audit
work had been received or not.
7. The report should state whether proper books of accounts had been kept as required by
the company’s Act or nt.
8. The report should point out whether the accounts audited are in agreement with the books
of accounts and related documents for transactions.
9. Finally, the report should state whether the final accounts or financial statements audited
give true and fair view.

TYPES OF AUDIT OPINION/REPORT:

The auditor’s report can be categorized into two; the third one is a situation where the auditor
disassociates him or herself from the affairs of the company and makes no opinion. Thus, the
opinion can take any of the forms below:
1. UNQUALIFIED AUDIT REPORT/OPINION:
This means that the auditor had received all the necessary information and documents, proper
books of accounts were maintained, final account are in agreement with the books of accounts
and related transaction’s documents, the Company applied a consistent accounting policy. In
brief, the auditor is satisfied with all the documents and books of accounts and that they are in
agreement with the final accounts. “Therefore, in our opinion the Financial Statements
present true and fair view”

2. QUALIFIED AUDIT OPINION OR REPORT:

When the auditor is in disagreement with the directors, for instance, because the directors limited
the audit work or there was uncertainty affecting the financial statements, the auditor qualifies
his report. When an auditor qualifies his report, it means that the uncertainty or Limitation to his
or her work has been very substantial.
A qualified opinion is a bad or unfavorable report to management’s performance. It denotes that
thing were not fine in all aspects as far as managements’ handling of the affairs of the company
is concerned. Much as management did well in certain areas, some areas registered problems or
failures. Qualified Audit opinion has two components:
a) Qualified opinion “subject to adjustments” in certain areas with problems,

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b) Qualified opinion “except few areas” without problems.

The qualified “subject to” opinion means things would be fine subject to adjustment in certain
areas. In other words, some few areas were found to have some material misstatements that
should first be adjusted if the report is to be good.
The qualified “except” opinion implies that there were material misstatements in all/all aspects
of the organization except in certain few areas that there were no material misstatements in the
facts and figures.

c) Qualified “Adverse opinion”

This means that the disagreement between auditor and management on the accounting Policies
used or the way books of accounts had been kept, is so material to the extent that the final
accounts cannot and do not give true and fair view of the state of affairs of the company.
This means that the auditors carried out their tests and found out that the fundamental principles
governing financial management and general operations were not followed in the management of
the company. In terms of maintenance of accounts for instance it may be apparent that GAAPs
were not followed, the double entry book keeping system not followed and as such it is difficult
to believe that the final accounts presented present true and fair view of the state of affairs of the
company. The auditors will thus state these facts and conclude by stating that the final accounts
audited do not present true and fair view of the affairs of the company in all aspects/in totality. In
fact if an adverse opinion is issued it is very unfortunate and it has disastrous consequences
compared to qualified audit opinion.

3. DISCLAIMER OF OPINION
When the auditor disclaims opinion, it means that the directors had substantially limited the
scope of the audit work and that the uncertainty affecting the financial transactions would grossly
affect the financial statements such that it would not give true and fair view of the state of affairs
of the entity. In fact, the Auditor for fear of being implicated for irresponsibility, does not give an
opinion but disassociates himself or herself from giving an opinion.
In this situation the auditor finds himself or herself totally devastated by the level of
mismanagement in the company under audit and as such disassociates himself or herself from

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making any opinion. Perhaps no proper books of accounts even exist, no proper assets register is
maintained, accounting principles not followed, no internal control system in place and
everything is total disaster.

AUDIT RISK:

 At the planning stage of the audit, the auditor should consider the extent and nature of the
audit work he or she is to perform.
 The riskier the client, the more work the auditor will plan to perform.
 This will help to direct attention and to ensure that appropriate level of audit is
intensified.
 In a situation where the client is highly risky, one would say audit should not take place
at all or it should be conducted in a very unique and different form.
 The risk might take any form in that; it could be that the client is operating in a volatile
market that makes it difficult for the client to continue succeeding.
 It could be the risk of financial statements being misstated because management is
biased.

WHAT THEN IS AUDIT RISK?

It is the likelihood of giving inappropriate opinion when financial statements are actually
materially misstated. It is the likelihood that given the audit environment, the auditor would end
up giving wrong opinion not out of the auditor’s negligence but it is circumstantial.
Audit risk has three components namely;
1. Inherent Risk (IR)
2. Control Risk (CR)
3. Detection Risk (DR)

Thus AR=IR+CR+DR

INHERENT RISK (IR):

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This refers to susceptibility or exposure of accounts balance or class of transaction to material
misstatement irrespective of the strength of the internal control system. Accounts balance will
be misstated irrespective of strong ICS in place.
This risk will be affected by such items as the extent to which the company is subjected to many
forces, the cash situation of the company, trading history of the company, the incidence of
unusual transaction etc.
Inventory for instance, is more exposed to inherent risk than say cash in the bank, as there is
greater scope for manipulation in inventory than cash in the bank.
A business in construction industry is riskier than a food retailer, since it is more volatile.

CONTROL RISK (CR):

This is a risk that material misstatement could occur in an accounts balance or class of
transaction due to weaknesses in the Internal Control system and the Accounting system in place.
The internal control system may fail to prevent or detect irregularities in accounts balances or
class of transactions, subsequently, leading to material misstatement. This risk would be affected
by such factors as the control environment of the company for instance integrity of the staff
operating the system and the integrity of top management etc. Others include the extent of
supervision control and the strength of controls in particular accounting areas. There should be
full documentation of the accounting and internal control system in the Auditor’s records and of
his or her assessment of the control risk. Evidence should be obtained to assess any control risk
that is expected. Risks should be mitigated to acceptable levels.
When tests of control are complete, auditors should review their preliminary assessment of
control risk.

DETECTION RISK (DR):

This is a risk that comes about due to the fact that, the auditor’s substantive procedures/tests do
not detect material misstatement in accounts balance or class of transaction. The higher the
auditor suspects detection risk to be, the more substantive procedures (Test) must be and the
larger the sample sizes must be.
Detection risk can’t be eliminated entirely, because it is a matter of human error.

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If detection risk cannot be reduced to an acceptable low level, a qualified audit opinion is to be
issued.

END

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